ESG Performance, Economic Policy Uncertainty, and Forward-Looking Bank Credit Risk: Evidence from U.S. Banks

Abstract

This study examines the relationship between environmental, social, and governance (ESG) performance and bank credit risk among publicly listed U.S. banks over the period 2016–2025. It distinguishes between forward-looking and realized credit risk by using the loan loss provision ratio (LLPR) as the primary measure of expected credit risk and the non-performing loan ratio (NPLR) as a robustness measure. Using fixed-effects and dynamic System Generalized Method of Moments (System GMM) estimations, the results show that stronger ESG performance is associated with lower forward-looking expected credit risk. The ESG pillar analysis indicates that the social dimension exerts the strongest risk-reducing effect, followed by governance and environmental performance. In addition, economic policy uncertainty weakens the beneficial effect of ESG on bank credit risk. By contrast, ESG performance is not significantly associated with realized credit deterioration measured using NPLR, suggesting that ESG primarily influences banks’ expectations of future credit losses rather than realized loan performance. Overall, the findings demonstrate that the impact of ESG on bank credit risk depends on both the measurement of credit risk and the surrounding macroeconomic environment.